Dummy variables Hill et al chapter 9

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Parameters that vary between observations Assumption MR 1 The parameters are the same for all observations. k= the change in E(yt) when xtk is increased by one unit, and all other variables are held constant

A model of house prices is the value of an additional square foot of living area, and is the value of the land alone This model omits to take account of location

Intercept Dummy Variables

Slope dummy variable

Combined intercept and slope dummy variables

The effect of a university on house prices: model

The effect of a university on house prices: data

The effect of a university on house prices: results

The effect of a university on house prices: conclusions

Qualitative Variables with Several Categories • Note that E 0 is excluded. • • The dummy variable trap

Interpretation of the wage equation

Testing for the existence of qualitative effects H 0: =0 H 1: 0, or >0 Test using a t test

Testing the equivalence of two regressions using dummy variables Known as the Chow Test

Testing the equivalence of investment demand in two firms Restricted Equation (No dummies) Unrestricted Equation (Dummy applied to all parameters) F<Fc=2. 8826 So the restrictions are not rejected and it is concluded that the equation is the same for both forms

An alternative way of computing SSU in the Chow test Estimate the simplified equation: for each firm separately SSEu = SSE 1 + SSE 2

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